SNP uses tax powers to stage £190 million raid on middle Scotland

The SNP’s Finance Minister has used the first Holyrood budget to include control over income tax to stage a £190 million raid on middle Scotland.

Derek Mackay confirmed that the Scottish Government intends to raise £79 million by having a lower salary threshold for the 40p higher rate of income tax than the rest of the UK. Those earning more than £45,000 per year will pay £314 more tax next year than if they lived in England.

The minister abandoned a controversial plan to seize the latter funds and redistribute them to the poorest schools across the country. This would have seen money taken from households in relatively wealthy areas such as Edinburgh and Aberdeen and handed to deprived parts of Scotland.

But opposition parties and trade unions said a £327 million cut in local authorities’ central government grant meant they were being held to “ransom”.

They warned this would force councils to implement a supposedly discretionary increase in council tax of up to three per cent next April, on top of the compulsory rise.

Kezia Dugdale, the Scottish Labour leader, warned the cut would “see the heart ripped out of public services” but the SNP insisted that local authority budgets would increase when the council tax hikes are included.

HM Revenue & Customs will start collecting different income tax from Scottish taxpayers in April 2017Credit:
PA

In an attempt to relieve the pressure on the embattled Transport Minister, Humza Yousaf, over the poor performance of the ScotRail franchise, he also said £3 million would be spent on reducing fares as a thank you to passengers for their “patience”.

Tax experts said he had delivered a “safety first” budget for 2017/18 that attempted to balance raising some extra revenue with not forcing high earners to move elsewhere in the UK.

Some departments such as higher education and sport face major reductions in their spending in April, prompting fierce criticism from universities that their funding is not “sustainable”. However, economists said the deepest public spending cuts would not be implemented until the following year.

But the Finance Minister faces hard bargaining with opposition parties in the New Year to get the package passed at Holyrood as the SNP now runs a minority government.

The Tories will refuse to strike a deal while he is imposing higher taxes than in the rest of the UK. Murdo Fraser, their Shadow Finance Minister, said Mr Mackay had “chosen to hike taxes on families and businesses, risking a choking of economic recovery.”

All the other opposition parties want him to increase income tax to fund additional public spending. Unveiling his plans in a full Holyrood chamber, Mr Mackay said it was a “historic budget” given it included the power to set income tax on earnings for the first time.

The Finance Minister refused to change any of the UK’s income tax rates but said he would not follow the Chancellor’s plans to increase the salary threshold for paying the 40p rate of income tax from £43,001 to £45,000, rising to £50,000 by the end of the decade.

But Mr Mackay told parliament: “We cannot accept that at this time of austerity top earners should benefit from an inflation-busting tax cut.”

The minister said he was “sympathetic” to increasing the 45p rate of income tax, paid on earnings of more than £150,000. However, he said he had to balance “the risk to our economy” of wealthy taxpayers moving elsewhere.

Council taxpayers in the top four bands face a double increase next April

After confirming he would no longer seize the proceeds of the compulsory council tax increase in the top four bands, he said the Scottish Government would instead provide £120 million from other sources to improve the poorest schools.

A spokesman for Mr Mackay could not specify later where the additional money was being found. However, the minister told MSPs councils could raise an extra £70 million by increasing council tax by a further three per cent.

Mr Fraser said the minister had had the chance to use his new powers to deliver “real growth” but had instead chosen to target families and businesses.

He said: “In not matching the UK increase in the threshold for the 40 per cent rate of income tax, the Finance Secretary is making Scotland the most expensive part of the UK in which to live, work and do business.”

Ms Dugdale said: “However the Finance Secretary tries to spin it, today’s budget means a real terms cut of £327 million from the SNP government to local services.

“And they’re making up the difference by holding councils to ransom – forcing them to use their tax powers, while they refuse to use theirs.”

Moira Kelly, chair of the Chartered Institute of Taxation Scotland Technical Committee, said: “This was a ‘safety first’ draft budget with only the most tentative signs of divergence between Scotland and the rest of the UK.

“Put simply, if they tax high earners or business too much then they risk the chance that some of them will base their location decisions around tax implications. Conversely, if they seek to undercut the rest of the UK to attract more of them in there are large dead weight costs and no guarantee the gambit will come off.”